Question

Question 1 (90 points) Following a strategy of product differentiation, SSU Co. makes a high-end computer monitor, CM12. SSU Co has been pricing its monitors at full cost plus a target operating income per unit. The capital investment is $1,000,000 each year. SSU's target rate of return on investment is 25% and markup percentage to full cost is 50% SSU Co presents the following data for the years 2017 and 2018: 2017 2018 Units of CM12 produced and sold 5.000 units 5,500 units Selling price $400 per unit Variable Costs Direct materials in total) 15,000 lbs 15,375 lbs Direct materials costs per pound $40 per pound $44 per pound Fixed Costs Conversion costs in total) $500.000 $550.000 Marketing costs in total) $360,000 $362,500 Required: (Show your work. Otherwise, you will not get any credit!) 1. What price should SSU Co. charge for a monitor in 2018 in order to generate a 25% target rate of return on investment? (30 points) 2. What price should SSU Co. charge for a monitor in 2018 if SSU' policy is to add a 50% markup to full costs? (30 points) 3. What is the revenue effect of the growth component? (30 points) Hints: Revenue Effect of Growth = (Actual units of output sold in 2018 - Actual units of output sold in 2017) Selling price in 2017

Answer 1

Requirement 1:

Direct Materials in 2018 = 15,375 lbs

Direct Material Cost per pound = $44

Direct Materials Cost in 2018

= Direct Materials in pounds * Direct Material Cost per pound

= 15,375 * $44

= $676,500

Conversion Costs = $550,000

Marketing Costs = $362,500

Total Costs

= Direct Material Costs + Conversion Costs + Marketing Costs

= $676,500 + $550,000 + $362,500

= $1,589,000

Capital Investment = $1,000,000

Target Return on Investment = 25%

Target Profit

= Capital Investment * Target Return on Investment

= $1,000,000 * 25%

= $250,000

Target Sales in dollars

= Total Costs ++ Target Profit

= $1,589,000 + $250,000

= $1,839,000

Unit Sales in 2018 = 5,500

Selling Price per unit

= Target Sales in dollars / Unit Sales

= $1,839,000 / 5,500

= $334.3636

Price to be charged to generate a 25% target rate of return on investment in 2018 = $335 (the price is rounded off to next dollar since if the price is $334, then the target profit will not be generated).

Requirement 2:

Total Costs = $1,589,000

Target Profit

= 50% on total costs

= 50% of $1,589,000

= $794,500

Target Sales in dollars

= Total Costs + Target Profit

= $1,589,000 + $794,500

= $2,383,500

Unit Sales in 2018 = 5,500

Selling Price per unit

= Target Sales in dollars / Unit Sales

= $2,383,500 / 5,500

= $433.3636

Price to be charged to generate a 50% markup to full costs in 2018 = $434 (the price is rounded off to next dollar since if the price is $433, then the target profit will not be generated).

Requirement 3:

Actual Units of output sold in 2018 = 5,500

Actual Units of output sold in 2017 = 5,000

Selling Price in 2017 = $400

Revenue Efffect of the Growth Component

= (Actual Units of output sold in 2018 - Actual Units of output sold in 2017) * Selling Price in 2017

= (5,500 - 5,000) * $400

= 500 * $400

= $200,000

Revenue Effect of the Growth Component = $200,000